Trading vs Investing: which one is better?

Which one is better, trading or investing? When I started, I was exposed to these two group of people, those who tell me, you know, if you want to make money, you need to look at the fundamentals of the company. And that's why you decide if you have to buy or not. And this is the investing type. And then there were other people that were like, oh no, you have to look at the charts and the indicators and that's how you can make money. So before telling you which approach is better, in my opinion, I want in this video to compare the main differences between trading and investing. So let's start. First thing, if you look at trading, usually the focus is technical analysis. Okay? And this means you look at charts like these when you have the Japanese candlesticks, if you don't know what they represent, I made a video about that. But basically every candle represent the low, high, open and closed price. And you can have indicators like moving averages, stochastic macd, and you have a lot of them. So by looking at these, you are trying to understand the psychology of people that are buying or selling from. For example, if you see price going up parabolically, this may represent the greed. If you see a very, very sharp drop, it can be fear for something. So you base your decision based on these chart patterns and indicators. But in investing, usually the focus is fundamental analysis. What is fundamental analysis? Well, is looking at the financial statement of the companies, things like the cash flow statement and the income statement and the balance sheet. And you look at that to understand, first if the company is strong and second, to derive with some formula what is called intrinsic value that is somehow a fair value for the stock. So what is the idea? The idea is that if the current price is below intrinsic value, you can potentially buy. And when the price is going above, you could sell. So this is a main difference between trading and investing. Let's move to the style. Now, when you do trading, you can do long or short, where long means you buy with the hope for the price to go up and you make money when the price is going up. But short selling means that you are selling. So borrowing shares, selling them and buying back later. So you make money if the price is going down. In investing, usually you only go long. That's one of the main differences. Now to do trading, you usually need to use leverage. Leverage means that you can use more money than what you actually have in your account. And the thing is that to make money with trading, usually you need to buy, you need to risk a certain amount of money and you Will see later when we discuss about stop loss. And then you take profit at some level. But to have a decent profit, you need to buy a lot of shares. And sometimes if the stock that you are considering is expensive, you may not have enough cash to buy that. So you need leverage. But with investing, usually you have no leverage or just a little bit because all your money is at risk. Here you don't have stop loss. So if you risk more than what you have, then you may have this situation like margin call where the broker is like, you know, if you don't top up, I have to sell everything because you are losing more than what you have. So let's move to the risk type. As I said, when you do trading, you use stop loss. So what does it mean? It means that, for example, you say I buy here and then I put my stop loss at this level. Okay, so what does it mean? It means that if I buy here and the price goes down, you know that here you will sell automatically. So you know how much you are risking this difference r and at the same time, you may have a take profit level. Okay? So you know the risk. You know how much you make when you, when you win. And then by knowing that, you manage your risk basically because you are deciding how much you want to risk, usually 1, 2% of your capital. But with investing, usually if I buy, let's say $10,000 of a stock, worst case it can go to zero. So I'm basically risking everything, the whole amount, the whole basically capital I have. So how to mitigate risk in this case? Well, one thing is diversification. What does it mean? Imagine you want to buy eight stocks. Well, maybe you don't want to buy all of them from the technology sector. Why? Because if the technology sector suddenly goes down, it's very likely that all your stocks are going down at the same time. So it's better to diversify in strong companies from different sectors. And this is one way you can manage your risk. With investing. What is the main challenge of trading? I would say the main challenge is that you may encounter a series of losses, a losing streak. What does it mean? Every system, trading system is associated with some winning rate. For example, you may have a system that is like 50% of the times you win or 55 you win. And then remember that even if you win less than 50% of the times, you can still make money. I made a video about that. But the idea is that you need to consider not only how many times you win and you lose, but also how much you win when you win and how much you lose when you lose. But this is another story. What I want to say here is this. If you have a series of losses and this is normal, because even if your system is 60% right, you may still have like, I don't know, 10 losses in a row, then the challenge is you don't have to lose confidence on your system. You don't have to start to feel bad and change it and say something like, oh, it doesn't work anymore. Oh my God, what happens? Nothing happened is possible. So you need to have the emotional strength to be able to keep executing the trades even when you have some periods of loss. However, when you do investing, the challenge is unrealized loss. Why? Because in investing, when you are holding your stocks, as we said, we don't have a stop loss. So what can happen is that, for example, the market suddenly turn bearish and you may have periods, you may have events like the dot com crash in the 2000, the crisis, the subprime crisis, 2007, 8, when the market basically is going down a lot. And this means that very likely you will have a lot of unrealized loss. Unrealized, why? Because you are still holding. You don't close. And that's exactly the challenge. If you see that your stock price is going down and maybe your portfolio is down 10, 15, 20% even, you have to have the emotional capability to say, I don't care if my company is still strong, I don't have to sell just because the market is bearish. Because I know that in the long term, if my company is really strong, it will survive and go even higher. And this sometimes is not easy to manage because imagine you, every day when you check your portfolio, you see that you are down, you are down, and then you feel bad and then you want to stop to feel bad. So one idea will be, okay, I close my position and I'm done. But if you do that, basically you are buying high and selling low and is not a great strategy to buy made money. Finally, trading style is usually active. Active means that you have to frequently buy and sell. So trading, but for investing is more passive. You have to perform less operations in the market. Maybe you buy just a few stocks and then you hold for the long term. And then we see that more clearly in the next slide when we speak about time horizon. And as I said, in trading, you can have extreme cases like scalping, where you may hold your stock for like seconds or minutes, moving to something more reasonable, like days or weeks. But Imagine if you hold your stock for minutes, then how many operations can you do in a day or in a year? You know, it can be really active from this point of view, so quite time consuming as well. And also in terms of commission, this is more expensive because every time you buy and sell, basically you have to pay commissions to the broker, right? So this means that when you have trading, especially when it's very fast, you have more trades, more trades, and then you have to pay more commissions. Investing, on the other hand, the holding period can be months or years even because again, you are not speculating on a short movement of the price like in trading, but rather you are buying a company because you, you believe the company represented by the stock is strong and will produce even more earnings in the future and it will grow even, even more. So you are basically buying the business that is behind the stock. Sometimes in trading you don't even care what is a stock. You know, it's like the chart is nice, so I buy and then I don't care. But here you, you really want to understand the business. That's why you need to look at the fundamentals of the company. And that's why you are confident holding for the long term. Because you know that in the long term, if you did your homework, the price is going to increase. Now to answer to the question which one is better? So let's look at this chart. Okay, probably you know, this guy on the right, Warren Buffett is one of the most famous investors. Okay, so this is the representative of the investing. But here you have built down that maybe you don't know. So he created this fund and this done fund. And his style is mostly on technical analysis. Ta. So this is fundamental analysis and this is technical. So this is more trading. And here in this chart you see the fund of Dan in green. And then you see the price of Berkshire Hathaway. That is the company of Warren Buffett. So from the 87 to 2008, first you observe that thousand dollars invested here would have been like 30,000 with Dan and 22 with Buffett. So you may say, okay, it means that trading is better. Actually, no, because if you look during the years, there are situations where the blue line is above the green. Okay, so Buffett was doing better, like here for example. But there are also situation where the green line is above the blue, like here or recently here. So what does it mean? It means that sometimes this is called the no free lunch theorem. It means there is not one approach that is clearly outperforming all the others all the time. This is impossible because it will be the famous holy grail that some people think they can find by finding this magic strategy that make money all the time is not possible. There are many possible styles that gives different performance in different times. And the idea is that both approaches can be profitable. Actually, if you look at these charts, well, both of them give good results, you know. So the point here that I want to make is that you asking if fundamental or rather investing and trading is better is not a good question because first is better compared to what. But if in general you think that better means one is clearly always better than the other, then it's not the case. So what is the conclusion of this first thing is when you are choosing for an investing or trading approach, rather than looking at which one is the best that we have seen is not really a good question to ask. I would say you need to understand what is your personality. For example, do you prefer to look at charts or financial statement? Do you prefer, do you want to dedicate more time and every day place orders? Or you want something more passive like investing where you can buy and then hold for months. So all these things can change from person to person and they are important to understand which style you want to follow. You may even follow both of them. You know, you may have some money where you do investing and you may have some other money where you do two trading. That's what I do. Another point very important. To be successful, you need to learn to manage your emotions. Why? We have seen that in trading you can have a series of losing trades. And what you don't have to do is to start to change the system or feel that something is wrong. When you have a series of losses, you need to have the capability to keep using your system and keep trading. On the other hand, when you do investing, the challenge, as we say this, the unrealized loss. So when you see red in your account, you don't have to feel bad and say, oh, I need to sell. Actually, it's much better to forget to check less frequently. And another point that I want to make that I think is important and is related to how to manage your emotion. Do not turn a trade into an investment. This is very important. What do I mean by that? Sometimes people, when they do trading, they buy, okay, they are here and then they have their stop loss here, right? So maybe the price is going up and then it starts to go down. And when it's approaching the stop loss, what do they do? They say, okay, actually you know, What? Well, it's not a trade, it's a good company. So I removed the stop loss and is an investment now, right? And maybe the price is going down and then you don't know what is going to happen. But this is very risky because one thing you should do is to decide what to do before you do. In other words, if you decide that this is your stop loss and this is a trade that must stay a trade. You cannot let the market price movement determine later if this is getting is becoming an investment. But before it was a trade. So this is very risky because maybe, as I said, when you do trading you can even use leverage. So you may end up with a big loss way more than what you would have if you just follow your system and sell here as you should have done. So with that, I would like to thank you. I hope you find this video useful and I hope it will help you to decide if you want to do trading, if you want to do investing or why not if you want to do both. Thank you for watching. Subscribe to this channel for more videos and as usual, see you next time.